For governments like the ones in Stockton and Illinois, government worker pension plans need ambitious investment returns of nearly 8 percent year in and year out to fund the overly generous benefits officials have handed out

If an Illinois worker takes a pay cut during a recession, she knows the state isn’t going to take an even bigger chunk out of her paycheck. That’s because the state income tax rate stays the same. But if her home loses value, too, she could still see her property tax bill go up. Government...